Cloudflare (NYSE:NET) stock has declined over 55% from its previous high back in November last year. Nonetheless, investors should still be hopeful about a significant NET rebound in the near future due to its robust revenue growth.
Cloudflare’s 54% revenue growth is certainly impressive. However, it is important to remember that the company reported an annual loss of $260 million last year. Moreover, its $656 million revenue does not justify its current $29.5 billion market capitalization.
Of course, Cloudflare will undoubtedly be a good long-term investment. Cybersecurity will always remain an important segment of the tech industry, and admittedly, the company is very influential. At least 9,422,990 websites use Cloudflare for their security. In addition, NET stock has found support at $80 and has been steadily regaining value.
So why do I recommend not buying the stock? The answer lies in the broader market. NET stock is intrinsically overvalued, and such overvalued stocks are unlikely to perform very well if the market gets worse. In the worst case scenario, a recession would be devastating for stocks such as Cloudflare.
A recession may not happen soon. However, it is better to be safe than sorry in the current market. In a capitalistic economy such as the U.S, there will always be periods of boom and bust. Thus, you should consider the prospect of a recession when investing.
There is also additional short-term risk for NET. Major companies, including Cloudflare, will release their first-quarter earnings in a few weeks, considerably affecting the market’s future. Moreover, Cloudflare’s strong revenue growth has generated a lot of expectations for the company, and an unsatisfactory quarter can drag it down even more.
Even if you are looking to hold the stock for the long term, I wouldn’t recommend putting a significant amount of your portfolio into the stock.
As an investor, your primary goal should be to maximize profit with as little risk as possible. In the case of a prolonged bear market or a recession, investing in overvalued and risky stocks could yield you a loss several times higher than the current inflation rate.
Therefore, I believe that investors should prioritize stocks that do well in a bear market, instead of Cloudflare. Such as retail. However, If you are still looking to invest in NET, I recommend investing a limited amount until the market stabilizes.
On the date of publication, Omor Ibne Ehsan did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
